Full year results could reveal enhanced shareholder returns

A rock-solid balance sheet means there  is a place in your portfolio for York-headquartered housebuilder Persimmon (PSN) on income grounds alone.

Short-term volatility

Investors should be prepared to accept some short-term volatility though as the triggering of Article 50, firing the start gun on formal Brexit negotiations, could create uncertainty during the key spring selling season.

A 5 January trading update revealed a cash pile of £913m as the company exercised tight control of working capital. Persimmon has already committed to return 110p per share a year to shareholders but could well announce an enhanced cash return alongside full year results on 27 February. This in turn could act as a catalyst for the share price.

Persimmon - 51% of units sold from 
Northern offices in 2015

Premium price

The stock is at a premium to the rest of the sector, trading at 2.1 times assets, 9.2 times 2017 earnings per share and offering a 5.7% yield based on Numis forecasts. This is justified by an excellent track record and its strong cash generation.

The company is still substantially below its pre-Brexit vote levels and like the rest of its peers looks attractively valued relative to the wider market. The implication being that investors do not believe the earnings forecasts.

So far, the housebuilders have defied bearish predictions over the impact of the UK’s vote to exit the European Union.

Davy analyst Colin Sheridan says: ‘In the immediate aftermath of the UK’s vote to leave the European Union last June, we downgraded our expectations for the new homebuilding sector to reflect a modest recession. In terms of assumptions, this meant a 2% pullback in volumes and a 3% fall in prices over the course of the year.

‘Recent reports from the builders, along with better new home construction data, suggest that this scenario is too pessimistic and that negative growth in 2017 is unlikely.’

Persimmon reported sales up 15% year-on-year in the second half of 2016 as well as a 4% rise in legal completions and 4% rise in average selling prices for the year as a whole and a 12% jump in its forward sales book to £1.2bn.

Levers to pull

House prices are starting to tail off but there are levers the company could pull to see it through any periods of tough trading.

Liberum analyst Charlie Campbell says: ‘Its long landbank means it could cut land spending entirely to boost cash flows, and the strategic landbank may continue to boost margins too. Northern areas have much better affordability than the south, which may mean better pricing in a weaker environment.’

We like Persimmon at £19.39.

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